Improvement seen in cotton producer prices

Paul L. Hollis Farm Press Editorial Staff | Sep 28, 2001

Just in case you haven't heard enough bad news this year about cotton prices, here's one more: factoring in the current standard of living and the inflation rate, cotton prices are at their absolute lowest ever — lower even than the seven and eight cents per-pound cotton seen during the Great Depression.

“Seven cents would buy more in 1933 than 40 cents will buy today,” said Bob Goodman, Auburn University Extension economist, speaking at the recent Alabama Cotton Field Day in Belle Mina. “But the good news is that while last year was tough, this year should be better. The price of cotton was low last year — in the 50-cent range — but the adjusted world price was so high that we got a POP payment of only two to three cents.”

The adjusted world price now is down to 30 cents, so the POP payment this year should be in the 20-cent range, says Goodman. “If you booked cotton today for 40 cents, you would be looking at a POP payment in the 20-cent range. So, you would be back up in that 60-cent range. The season-average price for cotton received by farmers last year will be near or below 50 cents, so this year should be better.

“This year should be better because — Number One — we'll have a higher POP payment, and — Number Two — growers in many parts of Alabama last year didn't have any cotton to sell. We should have cotton to sell this year, and the price will be somewhat improved,” he says.

Analyzing legislation

In looking at upcoming farm legislation, the U.S. Senate, says Goodman, has approved $5.5 billion in emergency disaster assistance. “This program pays 85 percent of your 1999 AMTA payment, for whichever crop you grow. For cotton producers, there's also a cotton seed rebate included in this legislation,” he says.

The U.S. House Agriculture Committee has passed and the Senate soon will be considering a new farm bill “that may actually help farmers,” says Goodman. “Basically, we're going back to a target price system with this legislation. Do you remember when we had the deficiency payments and target prices? We're going back to a system where we'll have payments. When prices are low, the government has established a target price, and payments will be made based on that.

“But AMTA payments will continue, and they'll be called ‘fixed payments.’ It's about six cents per pound for cotton, 30 cents for corn and 42 cents for soybeans. Then, if prices are low, the government will make a counter-cyclical payment, and this is identical to a deficiency payment. The counter-cyclical payment will be the target price — 74 cents for cotton — minus the fixed or AMTA payment — which will be six cents — minus the higher of the loan rate or the market price,” he explains.

If the farm bill proposed by the House committee was in effect today, cotton producers would be getting a good price for their crop, notes Goodman.

“The market price is 40 cents and the loan rate is 52 cents. You would be getting a 16-cent deficiency payment plus a six-cent AMTA payment. You get the deficiency payment and the AMTA payment on 85 percent of your crop, so the six cents translates into about five cents and the 16 cents translates into about 14 cents. If you sold on the market today, at about 40 cents per pound, and the 24-cent POP payment of this farm bill was in effect, we'd be looking at a price of about 83 cents per pound. The 85 percent applies to the program yield and not the actual yield made.

“If you weren't getting a POP payment, but you were getting the five cents, 14 cents and 52 cents, you still would get about 71 cents per pound for your cotton, and that would be very close to the target price of 74 cents.”

The proposed farm bill is a 10-year program, says Goodman, and payments are fixed and decoupled. Payment rates for current contract crops will be set at 2002 levels, and the soybean payment rate will be 34 cents per bushel with a comparable rate for minor oilseeds.

“The payments are decoupled, so you'll get payments no matter what you plant. Payments are made on the basis of your farm bases and your program yields. If you don't plant anything for one year, you'll get the fixed payment and the counter-cyclical payment. In a year of high corn prices and low cotton prices, you could plant your entire farm in corn. You could make a corn crop, sell it, and get government payments on the cotton base.”

The farm bill proposed by the House committee could be very similar to the final legislation, says Goodman, because the bill has enjoyed such strong support in Washington.